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EU’s carbon border tax

GS Paper 2

 Syllabus: Effect of Policies and Politics of Developed and Developing Countries on India’s Interests

 

Source: TH

 Context: The European Parliament – the legislative body of the 27-member EU, reached a political deal on the carbon border tax – Carbon Border Adjustment Mechanism (CBAM).

 

Background:

  • CBAM was first introduced as a part of the European Green Deal, which serves as a guide for both tax and non-tax policy initiatives in the EU to achieve its ambitious target of becoming climate neutral by 2050.
  • This was followed by a proposal for a regulation on CBAM in 2021 as part of the “Fit for 55” policy package, aiming to reduce GHG by at least 55% by 2030, from the levels of 1990.

 

What is the CBAM?

  • It plans to impose a tariff/import duty on a set of carbon-intensive imports, which will have to be paid by EU importers and companies who export such goods to EU countries.

 

Need for CBAM:

  • To prevent “carbon leakage”:
    • Carbon leakage is when companies relocate the production or manufacturing of carbon-intensive materials to countries with less stringent climate rules.
    • This is to avoid restrictions on carbon emissions in their home country.
  • To nudge behavioural change:
    • According to WB, less than 4% of global emissions are currently under carbon pricing regimes as envisioned by the Paris Agreement.
    • Most levies aren’t high enough to effect an actual change in polluter behaviour.
Old vs proposed regime in the EU
Emissions Trading SystemCBAM
Industries have to buy carbon certificates if the number of emissions crosses the cap.Will Phase out free carbon allowances to domestic business, so that it doesn’t get in a tangle with the WTO’s rules.

 

Significance: By setting the price for the carbon content of goods regardless of where they are produced, it will create a level field for businesses inside the bloc and those outside.

 

Why are developing countries/India opposing CBAM?

  • BRICS have opposed the measure, describing it as a unilateral, protectionist trade weapon that could lead to market distortion.
    • For example, India has contended that the CBAM will translate into a 20-35% tariff on India’s exports, which now attract an MFN duty of less than 3%.
  • Economic shock for countries reliant on one/more of the targeted industries.
    • For example, Mozambique’s GDP would drop by about 1.5% due to the tariffs on aluminium exports alone.
    • 27% of India’s exports ($8.2 billion) of steel, iron and aluminium products head to the EU.

 

Way ahead: Funds from the sale of the CBAM levy can be diverted to support climate action efforts in less developed countries. This will guarantee both climate justice and the achievement of carbon emission targets.

 

Insta Links:

EU’s Carbon Border Tax: Is it regressive and protectionist or an incentive for global decarbonisation?